Mutual Funds in the USA: An exhaustive reference manual

    Some of the most popular investment assets in the United States are mutual funds which afford people an opportunity to invest in many stocks or bonds without the need for choosing their preferred stock or bond. This guide will list a set of question that will help you in understanding what mutual funds are, to what extent these funds are useful and helpful for you and under which conditions they are disadvantageous to you as an investor in the U. S.

    The following are some of the most basic questions that everyone, Including those new to mutual fund investing, should answer of what really a mutual fund is?

    A mutual fund is therefore an investment fund that invests money belonging to many people in a portfolio of securities such as shares, bonds, and or any other securities. The first benefit of mutual funds mainly focuses on the fact that through mutual investment, small or individual investors can get professionally managed diversified funds. This means that each of the investors in the mutual fund possess shares and these are part of the assets that compose the fund.

Types of Mutual Funds

    In the U. S., there are many classifications of mutual funds as they vary depending on the goals and objectives of investors, their tolerance towards risk and their financial circumstances. Below are the most common types:

Equity Funds (Stock Funds)

    Most of these mutual funds focus in the stocks market. It is generally classified in to many types for example growth funds, value funds or even specific type of industry funds. Another type of mutual fund is equity funds which of higher risks but have higher return prospects in the long run.

Bond Funds

    There exists bond mutual funds that deals with corporate bonds, municipal bonds, or government bonds. This kind of funds are less risky than the stock funds thus suitable for investors who seek regular income.

Index Funds

    Index funds on the other hand investors’ funds to track a certain index, for example the S &P 500 index. These are run on a passive basis and they are cheaper than actively managed mutual funds in most cases.

Balanced Funds

    They make their funds invest in the stocks and bonds for a blend in order to buffer the risks and gains. Index Equity funds are excellent for investors who are in need of capital appreciation equal to or greater than inflation as well as current income.

Money Market Funds

    It is worth to state that money market funds belong to the low-risk category of mutual funds. They invest their money in short term securities for instance treasury bills. These funds are employed by the investor who seeks a liquid investment and wish to preserve their capital.

Target-Date Funds

    These funds involve changes of the asset mix in line with the retirement dates of the investor concerned. In this case, the fund moves towards a safer zone at the close of the landing period`s time-line.

  A mutual fund operates in a quite simple manner, though it might sound a bit complicated in the beginning.

    With mutual fund, you put your money together with other people’s money when you’re subscribing to the fund. A professional fund manager on the other hand has the duty of choosing which securities are to be included in a fund and at what times to buy or sell them. Net asset value or NAV is the value of the mutual fund and that is calculated by the value of assets that is included in the fund.

Investors earn returns through:

    Interest earnings most of which will originate from the securities the fund holds. Capital gains that is the profit made on the sale of securities. Changes in the price of the securities that the fund has in its inventory/ portfolio.

    From the above advantages of investing in mutual funds it is clear that investing in mutual funds offer numerous benefits as highlighted below.

Diversification

    These funds pool money from several investors and invest in various securities in order to minimize on risk as that involved in individual stocks or securities.

Professional Management

Mutual funds are professionally managed through portfolio managers and Analysts who make their investment decisions after researching on the best stocks.

Liquidity

In particular, mutual fund shares can be acquired and redeemed at the end of the trading day at the net asset value, NAV.

Affordability

    They provide an opportunity for aggregation of several funds from several individuals which makes it possible to buy securities which they could not afford on their own.

Reinvestment of Income

    Some mutual funds have provisions for reinvestment of dividends and also capital gains whereby the returns compound with time.

Disadvantages of Mutual Funds

Fees and Expenses

    The majority of mutual funds have management fees and sometimes, there in addition to the sales loads. All these fees form a common kitty that drops the overall return of an investor in the financial market.

Lack of Control

    For those investors who invested in mutual funds, they cannot decide on the type of securities that the fund manager is to purchase or to sell.

Tax Implications

    It means an investor may have to pay capital gains taxes even if he or she has not sold a single share in a fund. Such mutual funds also have distributions of capital gains to their shareholders every fiscal year.

In this article I will show you how to invest in mutual funds in the USA.

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Brokerage Accounts

    While exploring investment options most buyers adopt mutual fund using a brokerage account. Most of the brokerage companies provide their customers with a chance to buy and trade as many mutual funds as they want and some of them have no fees for making transactions.

401(k) and Retirement Accounts

    401(k) and IRAs often present mutual funds as one of the choices in investment that the employer can offer the employee. Such accounts enable investors to benefit from some favorable taxation policies, including; tax advantaging features like tax favorably on gains or, tax preferential treatment for the withdrawal of funds in Roth accounts.

Directly from Fund Companies

    Investors can purchase mutual funds from the mutual funds’ themselves such as Vanguard funds, Fidelity mutual funds, and T. Rowe mutual funds. These firms generally tend to charge less for their services and provide access to a greater variety of funds.

Major Players of Mutual Fund Industry in the United States Vanguard

    As such, a significant player of mutual fund industry with a low-cost index fund, Vanguard is a global firm.

Fidelity Investments

Being one of the most important actively and passively managed companies, Fidelity provides different types of mutual funds.

T. Rowe Price

T. Rowe is famous for its dynamic approach and the wide choice of the mutual funds that are suitable for retirement investment.

Mutual Fund Fees Explained

An important aspect you should know when you are ready to invest in mutual funds is the costs. 

Some of the most common fees include:

Expense Ratio: This annual fee is normally presented in the form of a percentage of the total size of the fund Assets. It helps it meet the cost of running the fund.

Sales Load: Fees are also classified under loads where some funds will require you to pay commission each time you purchase or sell shares. These funds are called “load funds. “

12b-1 Fees: These include marketing and distribution fees which some of the mutual funds levy on their investors. Not all mutual funds companies have 12b-1 fees, and if they were in place they are assuming certain responsibilities of revealing such fees.

Mutual Funds vs. ETFs

    As for diversification however, mutual funds and ETFs are quite similar, but not without key differences. ETFs can be bought and sold like equities intraday, as opposed to mutual funds wherein its units have only the closing trading price. Some of the ETFs are cheaper to operate compared to actively managed mutual funds as they hold lower expense ratios. Nonetheless, mutual funds may fit into the investors’ preference for automatic investment plans or even reinvestment of dividends without consideration of commissions.

Conclusion

    Holding securities in mutual funds is good for the diversification of the portfolio as well as to obtain professional management for the U. S. investors. It presents clear that there are burdens involved in mutual fund investment though the advantages such as diversification, liquidity and simplicity of usage have made mutual funds popular among investors. No matter what is the goal of savings be it for retirement, children’s education or mere accumulation of wealth mutual funds are a convenient and versatile choice.

    For those interested in developing a diversified investment portfolio in the U. S., it is necessary to know about mutual funds and their relation to personal investments. It is advisable to check on some aspects such as fees, the investment goals as well as tax consequences before investing.